Damian R. Beil

Supply Disruptions, Asymmetric Information, and a Backup Production Option

We study a manufacturer that faces a supplier privileged with private information about supply disruptions. We investigate how risk-management strategies of the manufacturer change and examine whether risk-management tools are more or less valuable in the presence of such asymmetric information. We model a supply chain with one manufacturer and one supplier, in which the suppliers reliability is either high or low and is the suppliers private information. On disruption, the supplier chooses to either pay a penalty to the manufacturer for the shortfall or use backup production to fill the manufacturers order. Using mechanism design theory, we derive the optimal contract menu offered by the manufacturer. We find that information asymmetry may cause the less reliable supplier type to stop using backup production while the more reliable supplier type continues to use it. Additionally, the manufacturer may stop ordering from the less reliable supplier type altogether. The value of supplier backup production for the manufacturer is not necessarily larger under symmetric information; for the more reliable supplier type, it could be negative. The manufacturer is willing to pay the most for information when supplier backup production is moderately expensive. The value of information may increase as supplier types become uniformly more reliable. Thus, higher reliability need not be a substitute for better information.

An Inverse-Optimization-Based Auction Mechanism to Support a Multiattribute RFQ Process

We consider a manufacturer who uses a reverse, or procurement, auction to determine which supplier will be awarded a contract. Each bid consists of a price and a set of non-price attributes (e.g., quality, lead time). The manufacturer is assumed to know the parametric form of the suppliers’ cost functions (in terms of the non-price attributes), but has no prior information on the parameter values. We construct a multi-round open-ascending auction mechanism, where the manufacturer announces a slightly different scoring rule (i.e., a function that ranks the bids in terms of the price and non-price attributes) in each round. Via inverse optimization, the manufacturer uses the bids from the first several rounds to learn the suppliers’ cost functions, and then in the final round chooses a scoring rule that attempts to maximize his own utility. Under the assumption that suppliers submit their myopic best-response bids in the last round, and do not distort their bids in the earlier rounds (i.e., they choose their minimum-cost bid to achieve any given score), our mechanism indeed maximizes the manufacturer’s utility within the open-ascending format. We also discuss several enhancements that improve the robustness of our mechanism with respect to the model’s informational and behavioral assumptions.

RFQ Auctions with Supplier Qualification Screening

We consider a manufacturer using a request-for-quotes (RFQ) reverse auction in combination with supplier qualification screening to determine which qualified supplier will be awarded a contract. Supplier qualification screening is costly for the manufacturer---for example, involving reference checks, financial audits, and on-site visits. The manufacturer seeks to minimize its total procurement costs, i.e., the contract payment plus qualification costs. Although suppliers can be qualified prior to the auction (prequalification), we allow the manufacturer to delay all or part of the qualification until after the auction (postqualification). Using an optimal mechanism analysis, we analytically explore the trade-offs between varying levels of pre-and postqualification. Although using postqualification causes the expected contract payment to increase (bids from unqualified suppliers are discarded), we find that standard industrial practices of prequalification can be improved upon by judicious use of postqualification, particularly when supplier qualification screening is moderately expensive relative to the value of the contract to the manufacturer.

Solving Truckload Procurement Auctions Over an Exponential Number of Bundles

Truckload carriers provide hundreds of billions of dollars worth of services to shippers in the United States alone each year. Internet auctions provide these shippers with a fast and easy way to negotiate potential contracts with a large number of carriers. Combinatorial auctions have the added benefit of allowing multiple lanes to be considered simultaneously in a single auction. This is important because it enables carriers to connect multiple lanes in continuous moves or tours, decreasing the empty mileage that must be driven, and therefore increasing overall efficiency. On the other hand, combinatorial auctions require bidding on an exponential number of bundles to achieve full economies of scope and scale, which is not tractable except for very small auctions. In most real-world auctions, bidding is instead typically limited to a very small subset of the potential bids. We present an implicit bidding approach to combinatorial auctions for truckload procurement that enables the complete set of all possible bids to be considered implicitly, without placing the corresponding burden of an exponential number of bids on the bidders or the auctioneer. We present the models needed to solve this problem. We then provide extensive computational results to demonstrate the tractability of our approach. Finally, we conclude with numerical analysis to assess the quality of the solutions that are generated and to demonstrate the benefits of our approach over existing bidding methods in practice.

Decentralized Supply Risk Management

In a 2008 survey of 138 companies, 58% reported that they suffered financial losses within the last year due to a supply disruption. This article emphasizes the challenges and opportunities in supply risk management arising from the decentralized nature of supply chains and highlight how supply risks influence the interactions among firms in supply networks, review insights into decentralized supply risk management from the extant academic research and point out important future research directions.

When Does It Pay to Delay Supplier Qualification? Theory and Experiments

We study a procurement setting in which the buyer seeks a low price but will not allocate the contract to a supplier who has not passed qualification screening. Qualification screening is costly for the buyer, involving product tests, site visits, and interviews. In addition to a qualified incumbent supplier, the buyer has an entrant of unknown qualification. The buyer wishes to run a price-only, open-descending reverse auction between the incumbent and the entrant, and faces a strategic choice about whether to perform qualification screening on the entrant before or after the auction. We analytically study the buyers optimal strategy, accounting for the fact that under postauction qualification, the incumbent knows he could lose the auction but still win the contract. In our analysis, we derive the incumbents optimal bidding strategy under postauction qualification and find that he follows a threshold structure in which high-cost incumbents hold back on bidding---or even boycott the auction---to preserve their profit margin, and only lower-cost incumbents bid to win. These results are strikingly different from the usual open-descending auction analysis where all bidders are fully qualified and bidding to win is always a dominant strategy. We test our analytical results in the laboratory, with human subjects. We find that qualitatively our theoretical predictions hold up quite well, although incumbent suppliers bid somewhat more aggressively than the theory predicts, making buyers more inclined to use postauction qualification. This paper was accepted by Martin Lariviere, operations management.

Split-Award Auctions for Supplier Retention

To stay abreast of current supply-market pricing, it is common for procurement managers to frequently organize auctions among a pool of qualified suppliers the supply base. Sole awards can alienate losing suppliers and cause them to defect from the supply base. To maintain the supply base and thereby control the high costs of finding and qualifying new suppliers, buyers often employ split awards, which in turn inflate purchase costs. This results in a trade-off that we investigate in an infinite-horizon stationary setting in which the relative cost position of each supplier is randomly drawn in every period. We characterize the optimal split award that minimizes long-run costs purchasing and qualification and show that maintaining a constant supply-base size---using a “qualify-up-to” policy---is optimal for the buyer. We find that neither the extent of multisourcing nor the buyers value of split awards compared with winner-take-all auctions are monotonic in the qualification cost and that split-award auctions can increase ex ante system, buyer, and supplier benefits simultaneously. To our knowledge, this is the first paper studying split-award auctions for supply-base maintenance, and it will hopefully galvanize further research on this important topic. This paper was accepted by Yossi Aviv, operations management.

Sequencing surgery, radiotherapy and chemotherapy : insights from a mathematical analysis

We present results from a mathematical analysis that is aimed at finding the best way to sequence the three traditional cancer treatments: surgery (S), chemotherapy (C), and radiotherapy (R). The mathematical model tracks the temporal evolution of the primary tumor and its associated metastases, and incorporates the primary tumors effect on the dormancy and growth of the metastases. We show that the SCR schedule (i.e., surgery followed by chemotherapy followed by radiotherapy) achieves a higher cure probability than SRC if the primary tumor is sufficiently large or if the metastatic population is sufficiently large relative to the primary tumor. We also show that a novel schedule, SRCR, which splits the radiotherapy regimen into two disjoint portions, is optimal among all schedules, provided that the patients dormant metastatic tumors do not become vascularized within about 40 days after surgery.

Bid-Taker Power and Supply Base Diversification

We study a buyer who periodically auctions off short-term supply contracts among her supply base. To mitigate significant cost shocks to procurement, the buyer can diversify her supply base by selecting suppliers from different regions. We find that the buyers decision to diversify depends on her bid-taker power—that is, her ability to choose the auction mechanism. At one extreme, when the buyer has full bid-taker power and thus can dictatorially implement the optimal mechanism, she always prefers to diversify. At the other extreme, when the buyer uses a reverse English auction with no reserve price due to her lack of bid-taker power, she generally prefers to protect herself against potential price escalation from cost-advantaged suppliers by diversifying less. The managerial insight is that the more bid-taker power the buyer has to control price escalation from cost-advantaged suppliers the more she prefers a diversified supply base. This insight is shown to be robust to correlation between regional costs, ex ante asymmetry between regions, and intermediate levels of bid-taker power.

A Pooling Analysis of Two Simultaneous Online Auctions

Motivated by the ease with which online customers can bid simultaneously in multiple auctions, we analyze a system with two competing auctioneers and three types of bidders: those dedicated to either of the two auctions and those that participate simultaneously in both auctions. Bidding behavior is specified and proven to induce a Bayesian Nash equilibrium, and a closed-form expression for the expected revenue of each auctioneer is derived. For auctioneers selling a single item, partial pooling---i.e., the presence of some cross-auction bidders---is beneficial to both auctioneers as long as neither one dominates the market (e.g., possesses more than 60%--65% of the market share). For multi-item auctions, pooling is mutually beneficial only if both auctioneers have nearly identical ratios of bidders per items for sale; otherwise, only the auctioneer with the smaller ratio benefits from pooling. Poolings impact on revenue decreases with the number of bidders, suggesting that popular auction sites need not be overly concerned with mitigating bidding across auctions.